Shifting Sands

In the face of declining petro profits, Saudi Arabia should expect a revolution

by Passage Crampton ’15 & Lex Corwin ’15

The recent drop in oil prices is causing anxiety for OPEC members, Wall Street, and private energy firms. Since June, the price of a barrel of Brent crude has slipped from a high of $112 to  more than $50, to a current price of roughly $60 due to weak demand in Europe and the slowing Asian economies[1]. This decline in consumption coupled with the United States’ recent shale oil boom has been blamed for the price dropoff. While the price drop bodes well for consumers, producers will likely bear the brunt of the costs.

The biggest losers will be petroleum-producing Gulf nations whose national budgets depend primarily on the export of oil. Oil exporting states rely on their petroleum wealth to maintain their government budgets and the generous citizen welfare payments that buy stability from the marginalized and underrepresented populace. Of all these states, Saudi Arabia faces the biggest risk. Saudi Arabia is OPEC’s largest producer and until very recently was the world’s as well. Like other oil exporting Gulf states, it sustains low poverty rates, a high per capita income, and a robust welfare system. But Saudi faces a unique problem: its population is bigger and younger than most other Gulf states. Whereas Qatar can easily deal with its smaller, richer population in times of tension like the Arab Spring, Saudi has a larger, more diverse society. The Saudi ruling family has more to lose because a popular revolution is possible if Saudi cannot afford to subsidize falling wages and rising unemployment. While the Saudi monarchy has brought relative stability in the wake of the recent upheaval in the Arab world, its citizens will be less complacent once the King cannot afford to follow his precedent and continue sweeping welfare benefits costing in the tens of billions of dollars.

Built on black gold

After WWI, Saudi Arabia rapidly became a rich, developed country with the discovery of massive oil fields in the eastern Arabian Desert. For the last 100 years, it has been an Islamic Monarchy under the Saud family, without any form of representative government. The discovery of oil in 1938 and the birth of the petroleum industry transformed the barren desert of feuding tribes into a modern, developed and wealthy Kingdom. Until the recent drop in oil prices, Saudi Arabia was earning roughly one billion dollars in petroleum revenue a day. In 2012 they produced $331 billion in oil revenues, which is greater than that of Iraq, Kuwait, the the UAE and Qatar combined[2]. However, the economy is severely lacking in terms of private investment and entrepreneurial startups; the share of private sector GDP stands at  a measly 10%.[3] A fiscal budget crisis in the near future, regardless of its severity, could  permanently cripple the already meager private sector and throw Saudi’s political and social stability into turmoil.

Kingdom come

Saudi Arabia won’t be able to sustain the current social contract between the nonrepresentative monarchy and its citizens. With the looming prospect of oil reserve depletion, in addition to the current falling price of crude, the King faces a challenge he may not be able to buy his way out of. The Saudi government can neither afford nor is willing to undertake significant enough reforms to offset its civilians many grievances. The Saud family’s hesitance in adopting meaningful social and political reforms could be met by Arab Spring-style revolution.

Abundance and its discontents

Despite political upheaval across the Middle East and North Africa and sovereign debt crises in the Eurozone, Saudi Arabia’s economy continues to expand at a healthy pace, with 2013 real GDP growth up 3.8% to $745.3b USD.[4] Saudi is widely believed to possess about 16% of the world’s proven petroleum reserves, enabling them to solely rely on oil revenues to fund their national budget. This has led to  a resource curse as Saudi Aramco, the largest state owned oil firm, accounted for roughly 85-90% of the 2013 Saudi state budget.[5] This extreme overdependence on oil revenues has stifled both public and private investment and development in other industries. Unemployment is also high in the Kingdom — currently at roughly 10.5%. This is puzzling since the nation employs huge amounts of foreign nationals. The Saudi economy has become reliant on these foreign workers for filling low wage service industry jobs but also essential high tech science and engineering positions. Of the countries 8,412,000 active members of the labor force, an oversized percentage are foreign nationals, almost 6.7 million.[6] Saudi hopes to reverse this trend by spending unprecedented amounts of state capital on promoting higher education. The significance of the recent opening of the King Abdullah University of Science and Technology, is huge. Not only is it the nation’s first coeducational university, but it commences the ushering in of a new era of STEM focused education, over the traditional focus on theology. In addition, the amount of students studying internationally is also at historic highs, thanks to the international scholarship program launched by King Abdullah, the aging Saudi monarch, in early 2005. While these reforms are significant and demonstrate a willingness to fix popular societal and economic ills, without a diverse economy and increased citizens’ rights this new generation of highly educated and worldly young people will be reluctant to return to Saudi where they will lack the career opportunities and social freedom their international peers enjoy.

The Saudi government has many programs and projects in various stages of development to promote foreign investment. They have begun establishing six “economic cities” in different regions of the country hoping to stimulate a diverse array of industries, such as alternative energy power generation, telecommunications, and petrochemical. The King announced in early 2009 to spend $373 billion between 2010 and 2014 on social development and infrastructure projects.[7] Because of the lack of standard financial reporting and regulatory accounting, it is difficult to gauge these investments effectiveness. There are also significant deterrents to investment, specifically a government effort to force all employers to hire Saudis, a restrictive visa policy for all foreign workers, extremely slow payment under some government contracts, a very conservative cultural environment, and enforced segregation of the sexes in nearly all business and social settings.

The secret cost of buying stability

Saudi Arabia typically  forcefully shuts down any form of political protest. The Saudi Arabian National Guard, whose sole purpose is to protect the royal family from harm, has been known to resort to violent measures against political dissidents and prisoners.

Demonstrations are illegal in Saudi Arabia. In 2011, as waves of protest broke across the Arab world, Saudi Arabia took swift action to avoid a similar situation. A revolution like the one that erupted in Egypt would drastically drive up the global price of a barrel of Brent crude and severely shake the foundations of the Gulf region. In a proactive move uncharacteristic of the Saudi government, soon after Mubarak’s fall from power government officials announced $30 billion worth of welfare packages for its civilians, which included heavy pay increases and bonuses for government employees, various loan forgiveness programs, and a multitude of new employment opportunities.[8] Over the course of the year, spending on domestic infrastructure increased to almost $100 billion[9]. These capital improvement projects included new roads, schools, and hospitals. Similar to how Kuwait’s al- Sabah regime granted $3,500 of free foodstuffs for a year for every citizen, Saudi drastically increased its domestic food and water subsidies.[10] This has artificially shrank the price of food, leaving Saudi Arabia’s political and social stability in jeopardy if citizens’ cost of basic necessities sky rockets in the face of a budget deficit. This spending spree will only be beneficial in the short-term, and will not stave off long term issues. It has not bought loyalty–just time. Saudi activists have an active Twitter and social media presence. Millions of tweets per week argue against rampant wealth inequality, increased corruption and unemployment. Saudi Arabia is one of the highest internet and smartphone users in the world. In addition, Saudi’s notorious Eastern Province is currently an area of unrest, where an unruly Shiite population defies the government ban on demonstrations in frequent (and usually unreported) protests. These facts presuppose the inevitable: that soon, government spending won’t be enough to stop a troubled population from exploding.

A “special relationship”

One of the stalwarts of Saudi stability is the tried and true “special relationship” between Saudi Arabia and the United States. The very values and foundations of the Saudi government structure are antithetical to that of the US, but Saudi Arabia has long been an American ally in the volatile Middle East. The US has sustained a significant military presence both in Saudi Arabian territory and in the surrounding waters, benefitting from Saudi’s strategic location and accommodating demeanor. In addition, with the US continuing to be Saudi’s largest petroleum consumer, both countries benefit from supply security in an inherently demand driven market. For this convenience and import stability, the US has turned a blind eye to Saudi’s undemocratic and autocratic governance tactics, while providing them security in an increasingly volatile region. During the first Gulf War, the US’s first line of defense was intended not for Saudi’s small neighbor Kuwait, but for the Kingdom itself. This “oil for security” trade-off directly benefits both nations substantially. However, Saudi-US relations have soured significantly since the 9/11 terrorist attacks. The United States’ increased military presence in the region since 2001 has disturbed many of Saudi’s neighbors, and though Saudi remains silent on the issue, their dislike of the current situation is growing. Further, The United States’ outright support of Israel in recent regional conflicts stands in direct opposition to the Saudis, who aid the Palestinian Authority government in the West Bank. These juxtaposing allegiances add to the growing rift between the two nations. So far, however, the symbiotic relationship has remained strong and mutually beneficial. While losing the US as a customer would be ruinous for the Saudi economy, if the United States threw its support behind the citizens in the event of an Arab-Spring-style popular revolution, King Abdullah’s reign would be finished.

In 2011, King Abdullah watched the United States allow Hosni Mubarak, another longtime, autocratic dictator, fall from power in favor of the Muslim Brotherhood, who the Saudis label as a terrorist group. The United States once shared the same “special relationship” with Mubarak as they do with the Saudis today. The Saud family should experience a rude awakening and began to question the security of their own “special relationship” with the US.

Alternative interpretations

From a certain standpoint, Saudi Arabia’s future doesn’t look so bleak. After all, they are one of the richest nations on earth. They have invested surplus profits in a large sovereign wealth fund, now the world’s second largest at $675.9 billion, yearly returns of which are estimated to be 7%-12% or $47- $81 billion, respectively.[11] In addition, there are ambitious plans for a solar power industry, which would allow Saudi Arabia to export energy to other countries and increase its market share of alternative energies. At only 10 GW of production, the solar industry would earn almost $6 billion a year in revenue.[12] However, both the sovereign wealth fund and the expected solar industry are not enough to match the current annual $300 billion oil revenue. Without drastic increases in either sovereign savings or alternative industry, oil revenue will drop, and so will government spending and the large subsidies that buy societal complacency. Still, even with a drop in oil revenue, some would argue that Saudi Arabia is too ideologically and religious to undergo a collective civilian overthrow of the monarchy. In the past, the government has played the Shiite minority, who feel politically and religiously oppressed, against the Sunni Wahhabi majority. But this argument forgets that the Saudi population is young, educated, and internet savvy. Each of these attributes points to a generation that is more willing than any other to overcome religious and social differences for a higher cause, as shown by increased use of activist social media throughout the country.

A loud mouth falling on deaf ears

There are powerful voices in the Saudi government pushing for reform. Prince Alwaleed bin Talal, a cousin of the King, publicly asserts that Saudi Arabia can no longer depend on the US for support. He argues that Saudi Arabia can no longer be fully dependent on oil revenues and must make institutional changes and increase investment in international sectors. Prince Talal has unequaled access to the King’s ear, quite literally, and many of his reform ideas have not been implemented or even attempted. Considering Saudi has recently enjoyed the most profitable four years in its existence and has few major reforms to show of it.


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[5] 2012 Investment Statement

[6] 2012 Investment Statement

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[11] Yao, Jay. “How the Saudi Arabian

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[12] Yoa, 2014